Stock Valuation

STOCK VALUATION

Types of Inventories

1. Raw Materials 2.Work-in-Progress or Semi-Finished Goods 3. Finished Goods

Need of stock valuation

1. Determination of Income 2.Ascertainment of Financial Position

3.Liquid Analysis 4.Statutory Compliance

Inventory Record System

1. Periodic Inventory System-Under this method, stock is ascertained physically. Under this system valuation is done at the end of the period.

2. Perpetual Inventory System- Under this system valuation of stock is done after each issue and receipt.

Physical valuation is not done here.

Methods of Stock Valuation

1. FIFO Method- Under this method, for the purpose of pricing the issues, it is assumed that materials

received first are issued first.

2. LIFO Method- Under this method, for the purpose of pricing the issues, it is assumed that materials

received lat are issued first.

3. Simple average Method- Under this method the rates of purchases represented by stock at the time of issue are added and then divided by the number of such rates to obtain the simple average rate at cost.

4. Weighted Average Method- Under this method total cost of materials in stock at the time of issue is divided by the total quantity of materials in stock to obtain the weighted average rate.

5. Periodic Simple Average Method- In this case the rates of purchases during a given period are added and then divided by number of such purchases during that period. Opening stock representing last year’s purchases is not considered.

6. Periodic Weighted Average Method- In this case, to obtain rate of issues, all purchases during a given period in value (cost) are added and then it is divided by total quantity purchased. Here also opening stock representing last year’s purchases is not considered.

Note- Under both periodic simple average method and weighted average method all issues are made at a single rate.

Stock Level of Materials

Maximum Level= Re-order level + Re-order quantity-(Minimum Consumption X Minimum order period)

Or, = Re-order level + Re-order quantity- Minimum Consumption in Given Period

Minimum level= Re-order level-( Average Consumption X Average re-order period) or,

Re-order Level-(Average Consumption Rate X Average Lead Time)

Re-ordering Level= Maximum Consumption X Maximum re-order period) or,

Average Consumption X( Minimum Stock for emergency + Avg. Lead Time) or,

Safety Stock + Lead Time Consumption

Average Level= Minimum Level + Maximum Level\ 2

Danger Level= Average Consumption X Lead Time For Emergency Purchases

Economic Order Quantity= 2AO\C ?

Number of orders= Annual Consumption\ EOQ ( Order Size)

Time gap between two consecutive orders= 12 Months or 365 Days\ Number of Orders

Here ,A= Annual Consumption O= Ordering Cost C= Carrying Cost